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Blockbuster Q4 Profit Down, Online Subs Up

27 Feb, 2007 By: Erik Gruenwedel

Seeking to turn Blockbuster Inc. into a “triple-play” option involving in-store, online and download movie rentals, chairman and CEO John Antioco told analysts last week that the company remains committed to entering electronic streaming with a third-party service this year.

He declined to elaborate but said the market remains in its infancy and doubted potential revenues could be considered more than incremental at this time.

“But we don't want to get into it too late,” said Antioco.

Dallas-based Blockbuster reiterated a January announcement that Blockbuster Online added a record 700,000 online rental subscribers in the fourth quarter (ended Dec. 31), including 500,000 paying members.

The service generated $74 million in revenue compared to $44.1 million last year.

Blockbuster Online now has more than 2.2 million subscribers. For the 2006 fiscal year, the online service generated $248.3 million in revenues, compared to $142.8 million in 2005.

Blockbuster chairman and CEO John Antioco said he expects the online service to reach 3 million paying subscribers by the end of the first quarter (March 31) FY 2007 due in large part to a $35 million TV ad campaign that included last month's Super Bowl.

For the game, Blockbuster aired an updated version of its 2002 Super Bowl spot in addition to sponsoring the telecast's half-time show.

Antioco said subscriber acquisition costs related to implementing Total Access remain at $2 per subscriber per month. He said that cost should decrease as the online service adjusts its inventory purchases due to subscribers satisfying their new release demands at Blockbuster stores.

The CEO said the conversion rate of trial subscribers to paying members has exceeded the 75% rate he reported in January.

He wouldn't rule out a future price increase for Total Access in addition to enhancements such as special order rentals and a discounted online rental only option.

Antioco envisions special order movie rentals decreasing the number of titles and retail space needed in domestic stores.

“Total Access is on a roll,” said Antioco. “In January I said I would be disappointed to not hit 4 million subscribers [by the end of the year]. Obviously, today my expectations are much higher than that.”

Aggressive holiday TV marketing of Blockbuster's online movie rental, in-store return service helped drag down the company's fourth quarter profit to $12.9 million compared to net income of $18 million during the same period last year.

Big Blue said increases in worldwide same-store merchandise sales; favorable foreign exchange rates and a $30 million increase in revenues from Blockbuster Online helped drive total revenue up 1.4% to $1.51 billion, compared to $1.49 billion last year.

Domestic same-store rental revenues increased 0.3% compared to a 7.4% decline last year. Worldwide same-store rentals declined 1.8% compared to 7.7% last year.

Fiscal year 2006 revenues fell 3.5% to $5.52 billion compared to $5.72 billion last year.

In FY 2006, Blockbuster shuttered 362 company-owned stores in the United States, 245 stores internationally and 75 franchise stores. It now has 8,360 store locations worldwide.

Separately, Blockbuster disclosed it is attempting to resolve a dispute between its board and Antioco regarding a 2006 bonus payment to the CEO of $2.28 million.

Antioco claims he was entitled to a bonus of $7.65 million based on previously defined performance goals.

Blockbuster said it has set aside $4.5 million until this contingency matter is resolved.

Antioco's salary and deferred compensation in 2006 was $2.5 million.

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